Some credit card issuers are using a “dirty trick” to get around the new Credit CARD Act by marketing small-business cards to consumers, according to U.S. Sen. Charles Schumer, D-N.Y.
The American Bankers Association, however, says such incidents are rare.
Citing data showing a sharp increase in business credit card applications this year, Schumer on Sept. 1 suggested the trend indicates a “brazen attempt” by issuers to use “deceptive marketing” to lure unsuspecting consumers to apply for business cards that appear to be consumer cards, potentially exposing applicants to unfair industry practices.
In the Sept. 1 letter to Federal Reserve Board Chairman Ben Bernanke, Schumer called on the Fed to craft rules that would protect consumers from unwittingly applying for business credit cards not covered by certain new protections in the Credit Card Accountability, Responsibility and Disclosure Act, most of which went into effect in February.
Small-business credit cards are exempt from the Credit CARD Act, which prevents issuers of consumer cards from raising interest rates on existing balances except when a payment is more than 60 days late, requires issuers to provide 45 days’ warning of any changes in interest rates, fees or terms, and stipulates that issuers apply payments first to higher-interest balances.
“Credit card companies seem to be purposely hawking corporate cards to consumers who don’t own a business and may even be retired,” Schumer said in a statement.
Schumer is urging the Fed to issue rules that would make clearer distinctions between business and consumer credit card applications, including requiring applicants to provide a tax identification number.
However, the American Bankers Association has not yet seen any deceptive marketing for business credit cards, and any such actions would subject issuers to “significant penalties” under the Truth in Lending Act, a spokesperson for the group tells PaymentsSource.
“Business cards are treated differently under the law because the needs of businesses are very different than those of consumers,” the spokesperson says.
Small-business credit cards are subject to higher credit limits and greater risk, requiring a different level of underwriting, the spokesperson says. A Fed report in July suggested that small-business credit cards “should not be subject to the CARD Act because it could result in lowered credit limits for small businesses when they are already struggling to access sufficient credit to operate.”
Moreover, several of the nation’s largest small-business card issuers say they already comply with the rules Schumer says are necessary to protect consumers.
Wells Fargo & Co., for example, says it requires business card applicants to provide a federal tax ID number and verifies the business’ status. The company says its policies align with those Schumer recommends and has no plans to make changes.
JPMorgan Chase & Co. also requires small-business card applicants to provide a federal tax ID number and confirms they are business owners or someone who is authorized to charge expenses to a business. “While it’s possible for someone to receive an application for a small-business card who is not a small-business owner, that is not our intent,” a Chase spokesperson says.
Bank of America Corp. in April announced new small-business credit card terms mirroring many provisions of the CARD Act. The changes include no interest rate increases on existing balances except in certain circumstances, which is consistent with aspects of the law that went into effect in May.
As for the uptick in small-business card solicitations, issuers “are striving to achieve the right balance between making credit available for both consumers and small businesses and making the CARD Act work for consumers, all against the backdrop of a still very fragile economy,” the American Bankers Association spokesperson says.
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